Competition Creates Recession in Corporate Profits

Competition Creates Recession in Corporate Profits

Article excerpt

Although the economy as a whole manages to continue expanding,
business is beginning to suffer a profits recession.

The situation is rare since corporate profits are such an
integral part of the broader economy. But the evidence is
overwhelming: While third-quarter gross national product rose 2.5
percent, corporate profits fell.

Much of the decline was due to a nonrecurring event - money
assigned by five big banks to cover anticipated losses on Third
World loans - but even without these losses corporate profits in
general were off.

While totals are not complete, profits for the companies making
up the Standard & Poor's 500-stock index fell 22 percent to $4.98 a
share from $6.38 a share in the third quarter of 1988. Excluding
the banks the decline was 7 percent.

A survey by the Wall Street Journal showed a 21 percent drop in
after-tax earnings on continuing operations, and another by Business
Week indicated a 22 percent drop, with both declines negatively
influenced by bank performance.

Several industries performed much worse. Within the Standard &
Poor's, 13 of 25 industry groups fell from their year-ago levels,
compared with eight in the second quarter and just five in the first
three months of the year.

Other big declines occurred in the automotive group, aerospace,
printing and publishing.

Reviewing the numbers, Wright Investor's Service said it is
unlikely to see a fourth-quarter repeat of big bank write-offs,
``but you never know.'' It said ``unusual charges and writeoffs
have increasingly become a regular feature of fourth-quarter
earnings reports.''

While a sluggish, though still expanding economy has much to do
with the declines, intense competition is playing a large role,
typified by a 16 percent drop in Sears' profits after it slashed
prices in an effort to boost sales. …